Of course, what you're meant to say about this government is how new it all seems. A spanking new coalition led by new man David Cameron and his shiny new Conservatives. Together, they have tonnes of exciting new ideas about how to revolutionise welfare and create a big new society. There's more news in that lot than you'd get from half an hour with Huw Edwards.

Yet listen closely to George Osborne, the man who had top billing at the Tory conference on Monday, and what you hear is not new at all. What you get is a blast of the 70s.

No, I am not accusing the chancellor of drafting his budgets to Mott the Hoople (although a bit of All the Way from Memphis would perk up discussions of fiscal policy). And yes, I know that he was only born in 1971. But there's a two-word phrase that both Osborne and Cameron use which sums up their economic philosophy – and which is straight-up 70s revivalism. Those two words are: crowding out.

In Osbornomics, crowding out is both the explanation for the mess the UK is in, and the key to how we get out of it. In his budget speech this June, the chancellor described the state as "crowding out private endeavour". That is, the government uses resources – tax money, workers, even loans – which should go towards businesses. His remedy is simple: take the boot of the public sector off the neck of the private sector by slashing the size of the state and cutting taxes. That will enable businesses to grow and, hey presto, you have a flourishing economy.

True, there's also the alibi for the cuts that the chancellor gave us yesterday – the one about how it's-my-way-or-Weimar-Germany, which comes out whenever he thinks those insolent voters at the back aren't paying attention. But the crowding-out argument is about Cameroonian orthodoxy, rather than a supposed state of emergency. The thing about the phrase, and that view, is that it's not new at all; it's 35 years old. And it has already been tried – and failed.

In November 1975, when the current chancellor was four years old and Bowie was at No 1 with Space Oddity, Roger Bacon and Walter Eltis published a series of three pieces in the Sunday Times discussing Britain's economic crisis. Nowadays, that doesn't sound too remarkable. But back then, Harry Evans's Sunday Times was the top paper at a time when Fleet Street editors published and were heard. And Evans chose these two economists to diagnose the British disease at just the point when it was widely accepted that the country really was in crisis.

Oil prices were spiralling, inflation had shot up to around 25%, and government finances were in a mess. The Wall Street Journal ran an editorial that April urging investors to get out of UK assets headlined: "Goodbye, Great Britain".

For Bacon and Eltis, Evans's anointed economists, the solution was relatively simple. The public sector, which had crowded out productive private businesses, must get smaller – fast. As the state shrank, manufacturers would grow. The notion of crowding out had been used as far back as Adam Smith, and has been deployed in other areas since, but here it was in its most potent version.

With those pieces, Bacon and Eltis made themselves the professors of crowding out. Yet what was striking about their argument was the reactions it got from two different elites. Economists tore it to shreds: Bacon and Eltis, they pointed out, had taken barely any account of how companies were run, or that British products just were not as good as those made in Germany. "It was wrong conceptually, and it was wrong empirically," is how Professor Roger Middleton, economic historian at the University of Bristol, describes their thesis. But, he notes, "It was what the politicians needed."

And frontbenchers did lap up the argument. The Labour chancellor, Denis Healey, deployed it to justify his spending cuts. Crowding out also entered the vocabulary of the Tories, especially the new generation such as Margaret Thatcher and her pet intellectual Keith Joseph.

The Bacon and Eltis argument could have been made for intravenous injection into the political mainstream. Here were two well-credentialled academics addressing Britain's central problem with one easy-to-understand solution, written in terms that could be understood by a dozy backbencher from Sevenoaks. Plenty of alternatives were offered by other eminent academics – indeed, one of the most striking things about looking back four decades is how British economists rose to the challenge of discussing that crisis in a way they have failed to match this time – but crowding out was the thesis that took.

Yet when the academic argument was turned into real politics, it was a disaster. Crowding out, and the other fashion for stamping on inflation, informed Thatcher's early budgets and led to a painful economic slump. According to Manchester University's Centre for Research on Socio-Cultural Change, it also led to one in five of all manufacturing jobs being lost within 18 months in the early 80s. When Britain did finally get out of its slump, it was arguably thanks to a devalued pound and a financial boom. It wasn't due to the crowding-out doctrine.

There may be lots of new thinking in other areas of Tory policy, but the busted idea of crowding out is not among them. And it certainly doesn't apply now, when the private sector is not being elbowed out, but is almost flat on its back. Which raises the question: why does the chancellor keep flogging a dead horse?